Income inequality for American families

Sometimes I say I feel as if I have a pretty good understanding of the US economy – except that I’m 2-3 years behind. For example, I now feel as if I have a good understanding of the events that happened up until May 2020, but I’m still trying to develop a satisfactory understanding of what happened since then.

When it comes to household income inequality, the Congressional Budget Office operates on a similar schedule. CBO has just been published Distribution of household income 2019 (November 2022). But CBO has a better excuse than me for the time delay. Much of the underlying data behind this report is taken from income tax data. This data has the huge advantage not from a survey asking people about their income, but from what people have already submitted to the Internal Revenue Service, which in turn is cross-checked with data from employers, financial institutions, and more. Types of income (such as royalty payments). But income statements for 2019 aren’t sent until 2020, and the pandemic has pushed back when taxes are due. Thus, anyone working with complete tax data is always two years late.

The real strength of the report is not that it is up-to-date, but rather that it offers a snapshot in time combined with a helpful sense of trends in income inequality since the late 1970s, when it began to rise. Here are some charts that caught my eye. This is a snapshot of inequality across income levels for 2019. The sub-panel on the right shows that while the median income for the top 1% was about $2 million, this breaks down to a median income of $1.2 million for the 99 to 99.9 percent (ie top 1% not including top 0.1%), median income of $5.7 million 99.9 to 99.99 percent (ie top 0.1%, not including top 0.01%), median income of $43 million to top 0.01 %.

This figure shows where the income comes from for each group. In particular, the black lines show that the highest share of income comes from work income—that is, being paid for work done in the previous year—of all up to 99.9 percent. On the higher end, capital income and capital gains (think of rising asset prices like stocks and real estate) are the biggest share.

It’s easy to babble about whether inequality is too high or too low, but many people are better than me, so I won’t do that here. Perhaps it is worth saying that no one should expect income levels to be the same in a given year, for the same reason that there is no reason why a 19-year-old high school student should have the same income in a given year as a 50-year-old. Create a company that employs tens or hundreds of people. In addition, most people move between income levels over time as their skills, experience, and savings increase.

But CBO is just a numbers organization. Thus, the report is a place for information about the degree of income redistribution in the United States, and how that has evolved over time.

For example, here’s a number showing average federal taxes by income class: This metric included all federal taxes (eg, including payroll taxes for Social Security and Medicare), but it doesn’t include state and local income or sales taxes

This is the trend in average federal taxes paid at the top of the income distribution in the past 40 years or so. You will notice that although the topic has been a source of great political controversy, the ups and downs have largely faded over time.

This figure shows trends in what households in the bottom quintile of the income distribution receive in federal redistributive programs. Note that assistance in the form of Medicaid has skyrocketed, but of course, Medicaid can’t be used to pay rent or buy groceries. The other major transfers — Supplemental Security Income, food stamps (SNAP) and “others” — were flat or declining.

So, taking federal taxes and benefits into account, how much redistribution has occurred in 2019? The graphic shows the share of income for different groups before and after taxes and spending. The CBO writes: “The lowest quintile received 8 percent of income after remittances and taxes, compared to 4 percent of income before remittances and
taxes. … In contrast, the share of income after transfers and taxes for the top five was about 6 percentage points lower than the share of income before transfers and taxes. Because those families paid more taxes
They received in transfers, transfer systems, and taxes combined to reduce their share of income from 55 percent to 48 percent. Much of this decline was experienced by households in the top 1 percent of the distribution, whose share of income after transfers and taxes was 13 percent, 3 percentage points lower than their share of income before transfers and taxes.”

The Gini coefficient is a standard way to compress the income distribution into a single number. The Gini range is from 0 to 1, where a Gini of 0 indicates a perfectly equal distribution of income, and a Gini of 1 means that one person received all of the income. Here is the gini of income distribution in the United States over time. You’ll notice that the top line, income inequality based on market income, is rising over time. However, the bottom line, which is income inequality after taxes and transfers, shows that the Gini has been basically flat since 2000. The Gini in 2019 is higher than most of the 70s and 80s, but in 2019 it is similar to the peak years. Those periods, like 1986.

The general pattern is that, as market income has become more unequal, the tax and redistributive forces in the push toward more equality in after-tax, post-conversion income have become stronger over time, and since about 2000, these forces have been broadly in balance with each other Outside. Of course, there is nothing in these numbers that is an argument that the United States should not do more (or less) redistribution. But the factual claim that after-tax and after-conversion income inequality is rising exponentially over time is often exaggerated—and it just isn’t true for the past two decades.